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Johannesburg - Consumer inflation hit its lowest level since May 2006 when the annual rate of change in the consumer price index (CPI) fell to 4.6% in May from 4.8% in April this year – comfortably within SA's 3% to 6% target range for inflation.
Inflation has declined from a recent peak of 13.6% in August 2008, edging below 6% in February.
Economists cheered the news, which was expected, and predicted further reductions in the inflation rate in coming months.
However, most did not expect interest rates to decline as a result of the inflation rate drop, although they said the possibility of another rate cut would heighten if inflation surprised on the downside.
The South African Reserve Bank (Sarb) has cut interest rates by 5.5 percentage points since December 2008, taking the prime overdraft rate to 10%.
Sarb governor Gill Marcus said at the Bureau for Economic Research conference in May that the repo rate, currently 6.5%, was likely to remain at that level for some time.
Nedbank economist Carmen Altenkirch pointed out that the 4.6% rate was the lowest since May 2006.
She said downward pressure on inflation came from lower food prices as well as a further moderation in goods inflation, particularly durable and semi-durable goods.
Double-digit administered price inflation remained the main upward driver of headline inflation, she said.
Altenkirch said the inflation cycle was forecast to turn in the second half of 2010 as Eskom's 25% tariff hike came into effect and some degree of opportunistic pricing surfaced as consumer spending picked up slightly.
"Although we still expect interest rates to remain on hold well into 2011, the monetary policy committee (MPC) may surprise by easing further in July, given the near-term improvement in inflation and inflation expectations, particularly if growth figures start to disappoint," she said.
ETM economist Trevor Barsdorf said SA was gaining the benefit of low money supply growth, a relatively strong rand and global deflationary conditions.
He expected inflation to continue to moderate to a lower turning point of 4%, or even below. Barsdorf did not expect Sarb to cut interest rates in July, but "after that there is a possibility".
The forward rate agreement market was pricing in a 50% chance of a rate cut in September.
Standard Bank economist Danelee van Dyk said she expected inflation to reach 4% in July. The inflation drop was led by disinflation in consumer goods, particularly durable goods, where prices were sliding, she said.
Standard Bank expected interest rates to remain unchanged until May 2011, when they would rise.
Sarb said in its last monetary policy statement that the bank's CPI forecast indicated a slightly improved outlook compared with that presented at the previous MPC meeting, with lower projected inflation for 2010 and 2011.
The statement said CPI inflation was still expected to reach a low point in the third quarter of 2010, when it was forecast to average 4.7%.
Inflation was then expected to increase moderately and remain within the inflation target range until the end of the forecast period - which had been extended to the end of 2012 - at 5.3%.
- Fin24.com
